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| Letter I'm sending back to Ryan Cleary |
I came home last night after being away for some time and received not one but two Ryan Clear pamphlets with his new ideas to make the world a better place. NDPers have such an easy job. They go around and look for problems in society and then just propose a law to make that not happen anymore. It's like they have a magic wand they can just wave and it makes everything better.
So continuing on this trend, Cleary outlines some of the steps his visionary government will take to make our lives better. Specifically he is addressing credit card and other debt. He blames our household debt levels on the government. They may be responsible by imposing taxes which makes life worse, but I'm pretty sure the NDP wants even higher taxes.
Anyway, his 4 suggestions are:
- cap atm fees at $0.50
- lower credit-card interest rates.
- outlaw companies from charging clients for paper bills.
- crack down on payday loans
Although these suggestions make people feel all warm and fuzzy inside, they have negative consequences. If Cleary cannot see that, I do not think he should be a leader of any kind. Let's go through them one by one and look at why his ideas would not work.
ATM Fees
Contrary to popular belief, companies cannot charge anything they like for ATM fees, it is actually market driven. Most banks offer free bank machines to its clients, despite the fact that a bank spends thousands on a machine. To give you an idea how much they cost, a simple machine which cannot accept deposits costs around $3000. Let's say the deposit-ready machines cost $5000. That's a lot of money.
But what would happen if all ATMs could charge a maximum of $0.50 per transaction. Just like with everything in our economy, ATMs follow the rules of supply and demand. At a low price, demand is high, but supply is low. Companies that decide to install an ATM are making an economic decision. Here's an example: It is estimated that between 3-5% of foot traffic will use an ATM. If a private business gets 100 people on an average day, that's 3-5 transactions. If they charge $2 to withdraw money, they will earn $6-$10 per day from the machine. If the machine costs $3000 to buy, it will take about 300 days to recover the initial investment before they begin to make money. That doesn't include the cost for repairs, upgrades, and maintenance.
If Ryan Cleary's law goes through, instead of taking about a year to recover the investment, it may take 4 or more times that long. It could take four or more years to recover that investment, which makes it far less desirable. In fact, $0.50 may be the perpetual break-even point since there are fees and maintenance that must be paid making ATMs completely unprofitable. The result: far fewer ATMs being available.
But what about the banks you ask? Well, the same may hold true, but they may approach it different. Banks must pay a substantial amount to maintain bank machines. At the moment, they accept clients from other banks and earn usually around $1-$2 per transaction. However, if they can only charge $0.50, it may not be worth the extra maintenance that will be required and they may choose to not allow non-bank customers.
Lower credit-card interest rates:
It just seems kind-hearted to want to give people lower credit-card interest rates, but once again there are many negative consequences to legislated that. Right now, believe it or not, credit cards are a very competitive industry. It is simple to transfer your money from one credit card company to another. Companies are not charging sometimes 20% because they just arbitrarily decided to make that much money. Rather, they must balance their desire for profit and the laws of supply and demand. The fact is, right now the legal highest interest rate is 60%. When was the last time you saw a credit card charging that much? Why wouldn't they charge the maximum allowable amount? The reason is consumers would simply go elsewhere.
Credit card companies are subject to the laws of supply and demand just like ATMs are. 20% is how much the company believes it must charge some groups of people in order to make a profit but stay in business. Many people with bad interest end up not paying at all or declaring bankruptcy. That's a loss for the credit card company. For high risk individual, 20% is the amount they must charge to account for defaults, non-payment, and high risk. That's also why there is such a huge variety of card out there. Many offer 0% initially. Obviously the card companies make nothing on this. In fact, they lose money. I know people who perpetually switch from one 0% card to another, and essentially never pay interest.
If the government arbitrary limits the interest rate, the supply of cards will diminish. People with poor credit ratings will be unable to get a card from anywhere. They won't get lower interest, they'll get none. The fact is there are credit cards at all kinds of different interest rates. 5%, 10%, 15%, 20%. Why don't the people paying 20% get one that charges 10% if they are available? The answer is, they don't qualify, and eliminating 20% cards will just take away that option.
Outlaw companies from charging clients for paper bills
There are obvious flaws with this proposal as well. This law can easily be put into place and probably lots of people will applaud it, but ultimately no one is better off, here's why. Companies have a lot of expenses. Revenue - expenses = profit. Whether an expense is explicitly stated or not, the company must pay for it. Sending out paper bills costs money so they charge clients for that service. Making a law saying they can't charge for it doesn't take away the expense. Companies are not going to go into the red or go bankrupt to please Ryan Cleary, so what will they do instead? Basically companies will just charge everyone for the paper bills and just include that in the price. In fact, the companies really don't care about this much.
Right now, Rogers customers pay $2 extra if they want a paper bill. This includes the cost of printing, the paper, the envelope, the people hired in the department that does this, and the postage. Just say half the clients of Rogers avail of this. If the $2 was outlawed, Rogers would simply charge everyone $2 extra per month. They wouldn't say it was for the paper bill they would just add it to their service fees. Think of it this way. Rogers doesn't send out a detailed list of expenses. They don't say $8 went to tech support, $10 went to technicians, $7 went to advertising, etc. Instead they say it costs $80 per month for your telephone and internet bill. Right now they say if you get your bill online, you only have to pay $78 per month. If it became a law that you couldn't charge $2, they would just say it's $80 for your telephone and internet bill.
If you take it to an extreme, imagine Ryan Cleary said companies must send a representative to your door to announce your bill with a singing telegram and that companies couldn't charge for this. Your bill would just increase to $200 per month and they'd just say it's for service.
Crack down on payday loan gouging
The same principles of why banning high interest rates for credit cards or artificially lowering ATM fees will not work apply here. Payday loan companies operate in a competitive environment. If one company charges 10% per week for a loan, in order to compete another company will have to charge the same or less. Companies cannot simply charge whatever they like. Competition keeps them in check. I will not say more about this, since I've written a lot on the other subjects.
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Overall, these proposals represent a complete lack of economic understanding and are simply designed to garner support. Nobody likes paying high interest rates, but this is not the way to change it. Ryan knows these steps are popular and he is either simply appealing to the masses or he is completely naive about economics. Either way, I do not want him as my "leader".
